The Essar Group has decided to stay on as a partner with the Vodafone Group, the new majority owner in Hutchison Essar, but analysts say it would be better off selling its stake in BPL Mobile, a Mumbai cellular company that it controls, if it wants to maximize returns on its investment.
Oil-to-telecom major Essar, which brought BPL Mobile at a valuation of $315 a customer a year-and-a-half AGO, wants more than the $750-770 (roughly Rs33,000-34,000) per customer that Vodafone paid for Hutchison Essar, India’s fourth-largest mobile phone operator. At that price, BPL Mobile will be valued at about $775 million. But industry sources say the Ruias may expect closer to $1 billion.
The Vodafone deal, expected to close before April, will see the Newbury, England-headquartered company acquire control of a 67% stake in Hutchison Essar for $11.1 billion. Essar owns the remaining 33%.
Hutchison Telecommunications International Ltd (HTIL)—that sold its 67% stake to Vodafone—and Essar are in the middle of an arbitration battle over the ownership of BPL Mobile, which is expected to be resolved soon.
Experts feel Essar may be asking for too much from Vodafone. “Valuation is dictated by the buyer’s requirements, not the price sought by the seller,” says Alok Shende, head of tech practice in India at consultant Frost & Sullivan. Unlike players with no presence in the city, Vodafone will be by far the biggest operator in Mumbai after the Hutchison Essar acquisition, he added.
Instead of buying the BPL Mobile franchise, which has lost over a fifth of its customer base since it was sold in August 2005, Vodafone can aggressively market its services and increase its subscriber base. For a company such as Vodafone, which already has the infrastructure and marketing muscle, the cost of acquiring a new customer will be less than the $700-per-customer valuation being asked for, says Shende.
Valuations in the $700-800 per-subscriber range are reserved for market-leading brands Bharti Airtel and Reliance Communications. Bharti’s market capitalization works out to around $770 per subscriber and Reliance’s $660.
Analysts also point that the value of the BPL Mobile brand has further eroded because brand promotion and sales have lost momentum. In the months since August 2005, Hutchison Essar has increased its customer base in Mumbai by half to nearly 2.4 million.
A new entrant, on the other hand, may find value in BPL Mobile. “The highest price for an existing network in a place like Mumbai can only come from a completely new operator who has no presence in the city,” says Sheriar Irani, senior telecom analyst with investment services provider IL&FS Investsmart in Mumbai.
The Essar strategy, telecom industry sources say, will be to arrive at a valuation acceptable to the Vodafone management and then barter BPL Mobile for a small slice in Hutchison Essar.
At $750 million, it could land a 4% minority stake of Hutchison Essar.